How Congress and the Courts Are Closing in on Dodd-Frank

By Mike Konczal |

What are the serious threats to Dodd-Frank? Last month, Haley Sweetland Edwards wrote “He Who Makes the Rules” at the Washington Monthly, which is the best single piece on Dodd-Frank implementation I’ve seen. In it, she identifies “three main areas on this gauntlet where a rule can be sliced, diced, gouged, or otherwise weakened beyond recognition.” The first is “the agency itself, where industry lobbyists enjoy outsized influence in meetings and comment letters, on rule makers’ access to vital information, and on the interpretation of the law itself.” The second is the courts, “where industry groups can sue an agency and have a rule killed on a variety of grounds.” And the third is Congress, “where an entire law can be retroactively gutted or poked through with loopholes.”

How important have those three areas been? Looking at the first two and a half years of Dodd-Frank, the courts turned out to be the unexpected danger for financial reform. I have a piece in Bloomberg View today arguing this, as well as the fact that the courts are structurally biased against reform in some very crucial ways.

That’s not to say the lobbying battle is going well. But when the bill passed, people understood that rulewriting would be a difficult battle, and some groups like Americans for Financial Reform and Better Markets could at least help balance the lobbying efforts of financial industry groups. What was less understood was that the D.C. Circuit Court would have so many vacancies, and thus tilted to the far right and a radical agenda. I hope you check out the piece.

But what about Congress? Erika Eichelberger at Mother Jones has an excellent piece about the ongoing, now biparistan, efforts to roll back parts of Dodd-Frank’s derivative regulations that are starting up in the House Agriculture Committee. (I wrote about this effort for Wonkblog here.) This third area Edwards identifies, Congress, is only now becoming a serious battlefield. But isn’t the timing off? President Obama and the Democrats lost in 2010 but won in 2012. Yet while the threat of Congress rolling back Dodd-Frank, one of President Obama’s major achievements, with new bills wasn’t on the radar in 2011, it may be in 2013. Isn’t that backwards?
Part of the answer is that the rules are becoming clearer, so financial industry lobbyists have more concrete targets to bring to Congress. But there’s a political dimension as well. The general shutdown and polarization that dominated Congress after 2010 made a congressional threat to Dodd-Frank less likely. And ironically, the rise of the Tea Party within the conservative movement, even with its anti-Obama and anti-regulatory zeal, made bills to weaken Dodd-Frank less likely to pass. One reason is that the Tea Party wanted a full repeal of the bill or to gut entire sections, rather than more targeted interventions. Another is that the biggest losers in the 2010 shellacking were centrist “new Democrats,” those that would be more responsive to the needs of the financial industry than the progressive caucus that gained in relative strength afterwards.
It’s possible many more centrist Democrats could have moved a bill through Congress weakening Dodd-Frank as it was being implemented, especially if conservatives were looking to compromise. But remaining centrist Democrats were not going to remove the FDIC’s new resolution authority to end Too Big To Fail, which is what the Ryan budget calls for, or knee-cap the CFPB out the door, which is what the Senate GOP wants in exchange for nominating a director, or vote to repeal the bill in its entirety, which was a litmus test for the 2012 GOP presidental candidates. Especially after they just took a lot of heat to pass the bill. Deficit hysteria was the only thing that got momentum, with both parties doing serious damage by cutting the budget of the CFTC.
(The unpopularity of the financial industry probably didn’t help either. The congressional change that the financial industry most wanted, the delay of a rule designed to limit the interchange fees associated with debit cards, failed to clear 60 votes in the Senate.)
Now that the GOP is realizing that Dodd-Frank is here to stay, we might see more effort to reach across the aisle to dismantle smaller pieces of it in accordance with what the financial industry wants. Health care is facing a similar situation, where conservatives policy entrepreneurs are currently debating whether or not to work within the framework of Obamacare or continue trying to repeal it. Sadly, conservatives will probably do far more damage if they get to the point of accepting that Dodd-Frank is the law of the land and try to do more targeted repeals rather than wage all-out war.
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Mike Konczal is a Fellow with the Roosevelt Institute, where he works on financial reform, unemployment, inequality, and a progressive vision of the economy. His blog, Rortybomb, was named one of the 25 Best Financial Blogs by Time magazine. Follow him on Twitter @rortybomb.